Filling in the GAAPs in Individual Analysts’ Street Earnings Forecasts

• In Event: Analysts and their forecasts

Abstract

This study investigates cross-sectional variation in the earnings that individual analysts include in their GAAP EPS forecasts but exclude from their Street EPS forecasts. While prior research generally focuses on firm-level exclusions, we find that, for many firms, forecasted exclusions are not uniform across all analysts following the firm. We also find that within-firm variation in forecasted exclusions is more strongly associated with a firm’s income-decreasing relative to income-increasing GAAP earnings items and with recurring than non-recurring GAAP earnings items. Given prior mixed findings regarding the purpose and usefulness of analysts’ exclusions, we examine their association with individual analysts’ characteristics. We observe that analysts with greater experience and resources appear to exclude less from their Street EPS forecasts than do other analysts. Finally, we find that the accuracy of individual analysts’ GAAP EPS forecasts is positively associated with the magnitude of their forecasted exclusions and that this association increases in analysts’ experience and resources, but decreases in busyness. Future research relying on earnings forecast errors and research attempting to understand earnings exclusions should consider the significant within-firm variation in analysts’ exclusions.

Authors

• Brian Bratten, University of Kentucky

• Stephannie A Larocque, University of Notre Dame

• Teri Lombardi Yohn, Indiana University - Bloomington